Bloomberg News

KKR Seeks Up to $6 Billion by Year-End in Test of Demand

November 15, 2011

(Adds KKR earnings in eighth through 11th paragraphs.)

Nov. 4 (Bloomberg) -- KKR & Co. is seeking $5 billion to $6 billion by year-end for its next private-equity fund, according to two people with knowledge of the firm’s plans, an effort whose outcome may signal how competitors will fare in attracting new cash.

KKR, which has already gathered $4 billion for the fund, is aiming for a final target of about $10 billion, said one of the people, who asked not to be named because the information is private. The fund will focus on deals in North America.

The firm, based in New York, is trying to lure investors facing a barrage of pitches with terms it hasn’t offered on earlier funds, said the people. Clients will have the choice of a reduced asset-management fee or a greater share of fees levied on the companies in which the fund invests. The fund will have to meet a 7 percent preferred return hurdle before KKR can take its cut of investment profits.

“There are a large number of funds currently in the market as they need to raise follow-on vehicles,” said Kelly DePonte, a partner in San Francisco at Probitas Partners LP, which helps asset managers raise money. With stocks so volatile, some investors “are being cautious, though their issues are nowhere near as serious as they were at the end of 2008,” he said.

Buyout funds globally are attempting to gather $165 billion, more than in 2006 at the height of the boom, according to Preqin Ltd., a London-based researcher. Warburg Pincus LLC and Providence Equity Partners LLC are among the firms already garnering commitments. Carlyle Group is among those gearing up to do so.

TPG Capital

KKR is looking to raise much less than the $17.6 billion it gathered for its last fund, a trend common among private-equity firms. The previous fund was valued at 1.2 times cost and generating about a 5.5 percent internal rate of return as of June 30, according to performance data by Oregon Public Employees Retirement Fund.

Kristi Huller, a spokeswoman for KKR, declined to comment.

The company today reported a third-quarter loss as investment income turned negative on writedowns triggered by equity-market declines.

Pretax economic net income, a measure of profit excluding some costs, swung to a loss of $592.1 million, or 91 cents a share, from a profit $317.3 million, or 39 cents, a year earlier. Results were better than the average loss of $1.02 a share estimated by 12 analysts in a Bloomberg survey.

Asset Writedown

KKR wrote down the value of its private-equity holdings by 8.5 percent, reflecting declines in global equities markets in the quarter and leading to negative investment income of $688.5 million. KKR’s investments in its own private-equity deals accounted for the bulk of the mark-to-market change, which is done each quarter as the value of the holdings fluctuate.

KKR’s assets under management fell 5.2 percent from June 30 to $58.7 billion as world stocks plunged 18 percent in the quarter. Fee-related earnings rose to $98.2 million from $69.5 million.

TPG Capital is among the large private-equity firms that also are using incentives in the hopes of persuading investors to commit for the first close, a change from the pre-crisis years when they would fight to get into private-equity funds.

TPG, based in Fort Worth, Texas, is offering a 1.5 percent management fee for first-close investors in its TPG Opportunities Partners II, according to a private-placement memorandum reviewed by Bloomberg News. Later entrants will pay 2 percent.

Lisa Baker, a spokeswoman for TPG, declined to comment on terms of the fund.

New Jersey Pension

TPG is also rewarding some investors who make big commitments or put money into separate accounts, which are customized investment vehicles typically created for a single investor. These pools of capital can invest alongside a main fund in certain deals or strategies.

The New Jersey Division of Investment, which pledged $100 million to the Opportunities fund, will pay a 1.25 percent management fee. The pension fund also allocated $200 million to separate accounts, which will be charged a 0.5 percent fee.

Until recently, discounts to first closers were offered by a handful of large European funds. BC Partners Ltd. kicked off the trend last year when it offered a 5 percent discount on fees to investors that joined the first close on its latest fund. Since then, others such as EQT Partners AB and Cinven Ltd. have offered similar incentives.

KKR, Warburg Pincus and Providence Equity Partners are also offering reduced fees for large commitments.

--Editors: Larry Edelman, Christian Baumgaertel

To contact the reporters on this story: Sabrina Willmer in New York at swillmer2@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net -0- Nov/03/2011 23:24 GMT


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